Southport Magazine

After years of regular contributions, a 401(k) plan through your employer may become one of your largest financial assets. In some cases, your employer may also allow you to borrow against the funds in that plan, which may be another financial benefit to you.

As you continue to work and build for your retirement, you may be tempted to take a loan to cover emergencies or big expenses like college. But before you make that decision, there are some things you should know.

Paying Interest on the Loan
With a 401(k) loan, you can generally borrow up to 50 percent of the vested balance in your 401(k) account, or $50,000—whichever is less. However, you will have to pay the money back with interest. One benefit to you is that the interest is credited to your 401(k) account, not to your employer, so you are paying the money to yourself.

Paying Back the Loan
A 401(k) loan has several drawbacks. First, the money has to be repaid, usually over a five-year period. If you leave the company or the 401(k) plan is terminated, the loan will typically become due within 60 days. That can happen if you quit or are laid off. Such events can put a big financial strain on you and set back your retirement.

Another drawback is that if the loan is not repaid when due, then the balance will be treated as a withdrawal, and may be subject to income tax as well as a 10-percent penalty tax if you are younger than 59 1/2.

Financial Emergencies
If you face a serious financial emergency, borrowing money from your 401(k) plan may make sense. It can be easy to obtain, and you pay the interest to yourself rather than to a bank. However, consider it only after you’ve exhausted your cash savings accounts.

If you leave your employer for any reason, a 401(k) loan can set back your retirement and create a financial burden. In general, a 401(k) loan should be considered for emergencies only. It is best to leave your 401(k) alone so that you can continue building toward your retirement goals for the future.